CORNERSTONE RESEARCH
www.cornerstone.com
http://securities.cornerstone.com
Securities Class Action Filings
2008: A Year in Review
Research Sample
•
The Stanford Law School Securities Class Action Clearinghouse, in cooperation with
Cornerstone Research, has identified 2,867 federal securities class action filings between
January 1, 1996 and December 15, 2008.
•
These filings include 313 “IPO Allocation” filings, 69 “Analyst” filings, 47 “Mutual Fund”
filings, 40 “Options Backdating” filings, and 136 “Subprime/Liquidity Crisis” filings; the latter
category includes 21 filings related to auction rate securities.
•
The sample used in this report excludes IPO Allocation, Analyst, and Mutual Fund filings.
•
Multiple filings related to the same allegations against the same defendant are consolidated in
the database through a unique record indexed to the first identified complaint.
CORNERSTONE RESEARCH
Overview
Federal securities class action activity in 2008 was dominated by a wave of litigation against firms
in the financial services sector. A total of 210 federal securities class actions (“filings” or “class
actions”) were filed in 2008, a 19 percent increase over the 176 filings in 2007, and a 9 percent
increase over the annual average of 192 filings observed between 1997 and 2007 (Figure 1).1
Financial companies are defendants in 103 of these filings (49 percent), and 91 of those filings are
related to the subprime/liquidity crisis. The maximum dollar loss attributable to all the 2008 class
actions is $856 billion, a 27 percent increase over 2007.2 Financial firms represent 46 percent of
the maximum dollar loss in 2008. Evidently, litigation against the firms closest to the on-going
subprime/liquidity crisis was the dominant force in federal class action securities litigation in 2008.
Class Action Filing Summary
Average
(1997 – 2007)
2
2007
2008
192
176
210
Disclosure Dollar Loss ($ Billions)
$130
$153
$227
Disclosure Percent Loss (%)
1.1%
1.1%
1.6%
Maximum Dollar Loss ($ Billions)
$698
$676
$856
Maximum Percent Loss (%)
5.7%
5.0%
5.9%
Class Action Filings
Figure 1
This level of litigation activity against firms in a specific sector is unprecedented since the passage
of the 1995 Reform Act. Our newly introduced Litigation Heat Maps™ portray the intensity of
litigation activity within each industry over time and Figure 6 shows that nearly a third of all large
financial firms were sued in a securities class action filed in 2008. The scope of litigation activity
within the financial sector is even more pronounced when measured as a share of total sector
market capitalization. The companies named as defendants in class actions filed in 2008 accounted
for over half of the total market capitalization of the financial sector (Figure 7). Combining data for
2007 and 2008 indicates that firms representing approximately two thirds of the financial sector as
measured by market capitalization were the subject of a federal securities class action filing in the
last two years.
1
2
2008 filings include class actions identified as of 12/15/2008. Typically few class actions are filed during the last two weeks of the
year. All other years include filings through 12/31. Our “filings” counts consolidate multiple filings related to the same allegations
against the same defendant and are therefore counts of unique disputes.
Maximum Dollar Loss and Disclosure Dollar Loss are defined in the “Market Capitalization Losses” section of this report.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Overview
continued
Another interesting pattern in litigation in 2008 was the lack of increase in activity observed during
the second half of the year despite a dramatic drop in stock market value and an unprecedented
spike in market volatility (Figures 2 and 4). High volatility has historically been correlated with an
increased level of litigation activity. A break in this pattern in the second half of 2008 suggests that
a new dynamic may be at work. One possible explanation is that the market volatility has been so
large that plaintiffs found it difficult to isolate company-specific stock movements that could be
alleged to be the result of fraudulent activity from the broader noise generated by a market that
could swing 5 percent in a single day. If so, the market’s volatility may have deterred some filings.
CAF IndexTM – Semiannual Number of Class Action Filings
and S&P 500 Implied Volatility (VIX) Index
1996 – 2008
Number of
Filings
140
3
VIX Index
Average
Options Backdating
45
Auction Rate Securities
Subprime/Liquidity Crisis
127 126
All Other
115
120
110
111
107
3
4
17
109
109
105 104
104
99
100
40
116
115
107
94
35
99
4
85
83
79
80
30
30
34
76
64
68
60
5
62
9
9
47
25
5
69
69
53
54
42
20
9
55
60
73
15
49
15
40
39
10
20
5
0
Figure 2
0
96
H1
96
H2
97
H1
97
H2
98
H1
98
H2
99
H1
99
H2
00
H1
00
H2
01
H1
01
H2
02
H1
02
H2
03
H1
03
H2
04
H1
04
H2
05
H1
05
H2
06
H1
06
H2
07
H1
07
H2
08
H1
08
H2
This report provides a full review of federal securities class action filings in 2008, characterizing
the number of class actions both in terms of the number of filings and the associated market
capitalization losses; the current status of filed class actions; and the distribution of filings across
industries, stock exchanges, federal circuits, and the nature of the allegations.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Number of Filings
The Class Action Filings (CAF) Index™ reports 210 filings in 2008, the highest level of filing
activity since 2004. The number of filings in 2008 constitutes a 19 percent increase over the 176
filings in 2007 and a 9 percent increase over the annual average of 192 filings for the 11 years
ending December 2007 (Figure 3).3 In 2008, 97 filings, or almost half of all filings, were related to
the subprime/liquidity crisis: 21 of these were filed on behalf of holders or purchasers of auction
rate securities.
When the data are examined on a semiannual basis, it is evident that the number of filings began a
marked increase in the second half of 2007 (Figure 2). There were 317 filings in the last 18
months, a 71 percent increase over the 185 filings in the prior 18-month period. These increases
were largely attributable to filings related to the subprime/liquidity crisis that first emerged in
2007. There were 127 filings related to these crises in the last 18 months, 40 percent of the total
filings over that period. Over the same period, filings unrelated to the subprime/liquidity crisis
grew only 8 percent, from 176 to 190.
4
CAF IndexTM – Annual Number of Class Action Filings
1996 – 2008
242
224
215
215
209
1997 – 2007
Average (192)
Options Backdating
Auction Rate Securities
Subprime/Liquidity Crisis
All Other
189
21
178
180
173
210
176
9
175
39
76
116
111
128
24
109
92
Figure 3
3
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
The indices and charts throughout exclude IPO Allocation, Analyst, and Mutual Fund filings.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Number of Filings
continued
Figure 4 shows that high filing activity tends to occur in periods of high stock market volatility as
measured by the Chicago Board Options Exchange Volatility Index (VIX).4 This pattern, however,
does not hold for the fourth quarter of 2008 in which there was a sharp increase in volatility
without a resulting spike in the number of filings. Average stock market volatility in the fourth
quarter was the highest since the inception of the VIX in 1990 and 74 percent higher than in the
next most volatile quarter. The number of fourth quarter filings, however, was about the same as in
the third quarter of 2008 and lower than in the three quarters prior to that.
This departure from the observed historical relationship between filing activity and stock market
volatility raises a question about how this period might differ from others. One possibility is that
the high market-wide volatility made it difficult for plaintiff law firms to isolate company-specific
stock price changes that were allegedly the result of fraudulent activity. In a period in which the
overall market can decline by as much as 5 percent in a single day of trading, it may be more
difficult for a plaintiff law firm to make the case that even a large drop in a company’s stock price
is attributable to fraud rather than to market factors. If so, the market’s volatility may have deterred
some filings. Professor Joseph A. Grundfest of the Stanford Law School suggests a hypothesis that
attributes the decline in total filings to the filing activity within the financial sector (see
commentary on page 9).
5
CAF IndexTM – Quarterly Number of Class Action Filings, S&P 500
Composite Index and S&P 500 Implied Volatility (VIX) Index
1996 – 2008
VIX Index Average &
S&P 500 Index
Number of Filings per Quarter
80
Average
1,600
72
68
70
61
60
60
56
50
47
71
S&P 500 Index
Average
67
54
61
57
56
54
53
49
47
1,400
62
49
52
51
54
56
49
48
47
43
38
40
20
50
36
35 34
800
36
33
29
29
26
600
25
19
400
10
200
VIX Index Average
0
0
Figure 4
4
1,000
45
36
28
30
49
45
33
32 32 32
1,200
56 55
57
52
52
96
Q1
96
Q3
97
Q1
97
Q3
98
Q1
98
Q3
99
Q1
99
Q3
00
Q1
00
Q3
01
Q1
01
Q3
02
Q1
02
Q3
03
Q1
03
Q3
04
Q1
04
Q3
05
Q1
05
Q3
06
Q1
06
Q3
07
Q1
07
Q3
08
Q1
08
Q3
The VIX is a measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. See
http://www.cboe.com/micro/vix/introduction.aspx.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Number of Filings
continued
Although the number of filings increased in 2008, several companies were defendants in more than
one class action. As a result, the Filings Per Issuer (FPI) Index™ shows a decline from 2007 to
2008 (Figure 5). Of all the companies listed on the NYSE, NASDAQ, and Amex at the start of the
year, 2.23 percent were defendants in federal securities class actions filed in 2008, slightly down
from the 2.32 percent in 2007 and in line with the 2.24 percent annual average for the 11 years
ending December 2007.5
FPI IndexTM – Number of Filings Per Issuer
1996 – 2008
2.84%
2.66%
2.52%
1997 – 2007
Average (2.24%)
6
2.36%
2.35%
2.26%
2.32%
2.15%
2.23%
2.11%
1.58%
1.52%
0.80%
Figure 5
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
In this report, we introduce a new tool for analyzing securities class action activity by industry. We
focus on companies in the S&P 500 index, which measures the aggregate stock market value of
500 large companies representing all major industries. We obtain the composition of the S&P 500
index at the start of each year and ask two questions for each industry.6 First, what share of the
companies in the index at the beginning of the year was subject to securities class actions filings in
federal courts during the year? Second, of the total market capitalization of the companies in the
index at the beginning of the year, what share was accounted for by companies subject to securities
class action filings? Our findings are presented in the S&P 500 Securities Litigation Heat Maps™.
5
6
In Figures 5, 6, 7, 8 and 20 when we refer to the number of companies involved in litigation, we have consolidated all filings against
the same company so that the count is a count of unique companies.
This analysis uses the sector classifications provided by Bloomberg. According to Bloomberg, “sector” is the broadest classification
that represents the general economic activities of a company. Bloomberg divides companies into 10 sectors: basic materials,
communications, consumer cyclical, consumer non-cyclical, diversified, energy, financial, industrial, technology, and utilities. The
consumer cyclical sector includes airlines, apparel, auto manufacturers, auto parts and equipment, distribution/wholesale,
entertainment, food service, home builders, home furnishings, housewares, leisure time, lodging, office furnishings, retail, and
storage/warehousing. The consumer non-cyclical sector includes agriculture, beverages, biotechnology, commercial services,
cosmetics/personal care, food, healthcare products, healthcare services, household products/wares, and pharmaceuticals.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Number of Filings
continued
7
Figure 6
S&P 500 Securities Litigation Heat MapsTM
Percent of Companies Subject to New Filings*
2000 – 2008
2000
2001
2002
2003
2004
2005
2006
2007
2008
Basic Materials
2.4%
0.0%
0.0%
0.0%
0.0%
3.4%
0.0%
0.0%
0.0%
Communications
8.3%
17.4%
22.7%
4.8%
2.3%
4.8%
2.3%
6.5%
4.8%
Consumer Cyclical
5.5%
4.1%
5.3%
5.5%
2.7%
9.5%
2.8%
5.9%
2.9%
Consumer Non-Cyclical
4.5%
5.6%
9.7%
7.4%
8.4%
9.6%
7.1%
9.3%
7.4%
Energy
0.0%
3.3%
19.2%
0.0%
4.0%
0.0%
0.0%
0.0%
0.0%
Financial
4.2%
1.4%
18.3%
6.3%
13.6%
5.0%
0.0%
9.4%
32.6%
Industrial
2.9%
0.0%
6.1%
4.5%
4.5%
4.6%
1.6%
1.6%
3.2%
Technology
11.4%
14.8%
5.3%
3.6%
3.6%
5.4%
9.3%
0.0%
6.0%
Utilities
5.9%
5.9%
34.3%
2.9%
6.1%
3.0%
0.0%
3.2%
3.3%
All S&P 500 Companies
5.0%
5.6%
12.0%
4.8%
6.0%
6.0%
3.2%
5.2%
9.2%
Legend
0%
0% – 5% 5% – 15% 15% – 25%
25%+
* The chart is based on the composition of the S&P 500 as of the first trading day of each year.
Industries are based on Bloomberg sector classifications.
Percent of Companies Subject to New Filings equals the number of companies subject to new securities class action filings in federal courts
in each sector divided by the total number of companies in that sector.
Overall, 9.2 percent of companies in the S&P 500 index at the start of 2008 were defendants in a
federal securities class action filed in 2008 (Figure 6). As a comparison, Figure 5 shows that
approximately 2.2 percent of all listed companies were defendants. The 9.2 percent of S&P 500
companies defending securities class action lawsuits in 2008 accounted for 17.1 percent of the
market capitalization of the S&P 500 index (Figure 7). This means that these lawsuits were filed
disproportionately against the larger companies within the S&P 500.
Turning to data by industry, the financial industry was the sector most heavily affected by new
securities litigation in 2008. Of the companies in the S&P 500 index that Bloomberg classifies as
financial, 32.6 percent were defendants in 2008 filings compared to 9.4 percent just a year earlier.
These defendant companies accounted for 54.9 percent of the market capitalization of all financial
companies in the S&P 500 index in 2008.
Going back in time, we see a high concentration of filings activity in the communications sector in
2001–02, reflecting securities lawsuits against growth companies in the aftermath of the market
adjustment in this period. The high fraction of utilities companies subject to securities litigation in
2002 reflects both the relatively small number of utilities in the S&P 500 index (so that a few
lawsuits translate into a high share of total companies in the sector) and allegations related to
energy trading activity. Six of the 12 class actions that year against S&P 500 utilities companies
include allegations of irregularities in revenue recognition from energy trades with various
counterparties, including trades with Enron Corporation.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Number of Filings
continued
8
Figure 7
S&P 500 Securities Litigation Heat MapsTM
Percent of Market Capitalizations Subject to New Filings*
2000 – 2008
2000
2001
2002
2003
2004
2005
2006
2007
2008
Basic Materials
8.9%
0.0%
0.0%
0.0%
0.0%
5.6%
0.0%
0.0%
0.0%
Communications
23.6%
28.0%
34.5%
1.7%
4.2%
1.7%
0.4%
7.2%
4.7%
Consumer Cyclical
10.1%
4.6%
5.2%
2.7%
4.3%
4.8%
8.9%
3.3%
4.0%
Consumer Non-Cyclical
20.6%
4.7%
22.2%
11.0%
15.3%
11.5%
12.0%
13.9%
11.2%
Energy
0.0%
6.8%
8.2%
0.0%
44.2%
0.0%
0.0%
0.0%
0.0%
Financial
3.2%
0.8%
30.1%
6.5%
22.3%
7.0%
0.0%
18.7%
54.9%
Industrial
4.3%
0.0%
12.1%
4.7%
5.7%
6.5%
0.6%
0.3%
24.9%
Technology
3.3%
29.5%
2.9%
0.7%
1.6%
13.7%
12.6%
0.0%
13.7%
Utilities
9.2%
4.0%
42.1%
4.3%
5.0%
5.6%
0.0%
5.8%
4.1%
All S&P 500 Companies
11.6%
10.6%
18.7%
5.2%
12.5%
7.3%
5.0%
8.3%
17.1%
Legend
0%
0% – 5% 5% – 15% 15% – 25%
25%+
* The chart is based on the market capitalizations of the S&P 500 companies as of the first trading day of each year.
Industries are based on Bloomberg sector classifications.
Percent of Market Capitalizations Subject to New Filings equals the total market capitalization of companies subject to new securities class
action filings in federal courts in each sector divided by the total market capitalization of all companies in that sector.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Number of Filings
continued
Stanford Law School Professor Joseph Grundfest suggests that the high incidence of class action
filings in the financial sector in 2008 provides a potential explanation for the slight decline in class
action filings in the second half of 2008. Professor Grundfest explains that the flat profile in the
levels of class action filings in the face of very high stock market volatility is consistent with the
hypothesis that major financial players have already been sued:
As the subprime/liquidity crisis rocked the financial industry beginning in mid-2007, securities
class actions related to the crises poured in. While the fallout from the crises seems likely to
continue, the financial institutions with the deepest pockets have already been sued. If we examine
the 85 companies in the S&P 500 that Bloomberg classified as being in the financial sector at the
beginning of 2007 (prior to the start of the crisis), nearly one-third have been sued in subprime/
liquidity crisis-related securities class actions. Furthermore, nine out of the largest 10 companies
ranked by market capitalization and 12 out of the top 15 companies had been sued by the end of
2008. In the next set of top 25 companies, just nine were defendants in subprime/liquidity crisisrelated lawsuits and the share of companies targeted by lawsuits thins out further down the list.
9
The fact that most of the lawsuits filed in 2008 were concentrated among the largest financial
institutions may indicate a rational strategy by plaintiff law firms to initially focus on defendants
with the deepest pockets. While an initial focus on the largest financial institutions may have kept
the number of filings lower in the second half of 2008, it is unclear as to whether the wave of
litigation will extend significantly beyond the largest financial firms in the near future.
Incidence of New Subprime/Liquidity Crisis Filings in 2007 and 2008
for Financial Companies in the 2007 S&P 500 Index
37.2%
Not Subject to New
Subprime/Liquidity Crisis
Filings in 2007 or 2008
62.8%
Subject to New
Subprime/Liquidity Crisis
Filings in 2007 or 2008
67.1%
32.9%
Percent of Companies
Figure 8
Percent of Market Capitalization
Note: The chart is based on the composition of the S&P 500 as of the first trading day of 2007 and Bloomberg financial sector classification.
Percent of Companies Subject to New Subprime/Liquidity Crisis Filings equals the number of companies subject to new securities class action filings
related to the subprime/liquidity crisis in federal courts in 2007 or 2008 divided by the total number of companies.
Percent of Market Capitalization Subject to New Subprime/Liquidity Crisis Filings equals the total market capitalization of companies subject to new
securities class actions related to the subprime/liquidity crisis in federal courts in 2007 or 2008 divided by the total market capitalization of all companies
as of January 3, 2007.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Market
Capitalization
Losses
To measure changes in the size of class action filings, we track market capitalization losses for
defendant firms during and at the end of class periods.7 Declines in market capitalization over
extended periods may be driven by market, industry, and firm-specific factors. To the extent that
the observed losses reflect factors unrelated to specific allegations in class action complaints,
indices based on class period losses would not be representative of potential defendant exposure in
class action litigation. This is especially relevant for the post-Dura securities litigation
environment.8 This report tracks market capitalization losses at the end of each class period using
Disclosure Dollar Loss (DDL) and market capitalization losses during each class period using
Maximum Dollar Loss (MDL).
DDL is the dollar value change in the market capitalization of the defendant firm between the
trading day immediately preceding the end of the class period and the trading day immediately
following the end of the class period. MDL is calculated as the dollar value change in the market
capitalization of the defendant firm from the trading day during the class period when its market
capitalization was the highest to the trading day immediately following the end of the class period.
DDL and MDL should not be considered indicators of liability or measures of potential damages.
Instead, they estimate the impact of all the information revealed during or at the end of the class
period, including information unrelated to the litigation.
10
The Disclosure Dollar Loss (DDL) Index™ tracks the running sum of DDL for all class actions
filed in a given year. The DDL Index™ shows disclosure losses in 2008 are surpassed only by
losses in 2000 (Figure 9). DDL for 2008 totaled $227 billion: 48 percent more than in 2007 and 75
percent more than the annual average for the 11 years ending December 2007 (Figure 10). In 2008,
subprime/liquidity crisis-related filings accounted for $92 billion of DDL, or 41 percent.
DDL IndexTM – Disclosure Dollar Loss
(Billions)
2000
$250
2008
2002
$200
2001
2007
$150
2004
Historical Average
(1997 – 2007)
$100
2005
2003
$50
Figure 9
7
8
2006
$0
Q1
Q2
Q3
Q4
Market capitalization measures are calculated only for publicly traded equity securities.
In April 2005 the Supreme Court ruled that plaintiffs in a securities class action case are required to plead a causal connection
between alleged wrongdoing and subsequent shareholder losses.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Market
Capitalization
Losses
continued
Disclosure Dollar Loss
1996 – 2008
Dollars in Billions
$242
Options Backdating
Subprime/Liquidity Crisis
All Other
$204
$227
$197
$92
$140
1997 – 2007
Average ($130)
$153
$144
z
$40
$134
$93
11
$80
$77
$112
$93
$52
$45
$10
$42
$14
Figure 10
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
The Disclosure Percent Loss (DPL) Index™ tracks the running sum of DDL as a percentage of the
capitalization of the companies in the Wilshire 5000.9 The DPL Index™ also shows historically
high levels in 2008, exceeded only in 2000 and 2002 (Figure 11). DDL in 2008 represented 1.6
percent of the Wilshire 5000 capitalization, compared to 1.1 percent in 2007 and the 1.1 percent
annual average for the 11 years ending December 2007.
DPL IndexTM – Disclosure Percent Loss
2.0%
2000
2002
1.5%
2001
2004
2008
2007
1.0%
Historical Average
(1997 – 2007)
2005
2003
0.5%
2006
Figure 11
9
0.0%
Q1
Q2
Q3
Q4
See http://securities.cornerstone.com for complete details on the DPL Index™ calculation.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Market
Capitalization
Losses
continued
Like the DDL Index™, the Maximum Dollar Loss (MDL) Index™ shows higher market value
losses in 2008 than in recent years (Figures 12 and 13). MDL for 2008 was $856 billion: 27
percent higher than in 2007, 23 percent higher than the annual average for the 11 years ending
December 2007, and the highest level since 2002. MDL for subprime/liquidity crisis-related filings
totaled $456 billion in 2008, or 53 percent of MDL for the year.
MDL IndexTM – Maximum Dollar Loss
(Billions)
$2,500
2002
$2,000
12
2001
$1,500
2008
$1,000
2000
Historical Average
(1997 – 2007)
2004
2003
$500
2007
2005
2006
$0
Q1
Figure 12
Q2
Q3
Q4
Maximum Dollar Loss
1996 – 2008
Dollars in Billions
$2,053
Options Backdating
Subprime/Liquidity Crisis
All Other
$1,483
$856
1997 – 2007
Average ($698)
$768
$725
$676
$577
$276
$365
$293
$224
$349
$149
$47
Figure 13
1996
$456
$362
$100
$387
$363
$193
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
The Maximum Percent Loss (MPL) Index™ also increased in 2008 relative to recent years.10 The
MDL for all filings in 2008 represented 5.9 percent of the capitalization of the Wilshire 5000
during the class periods, the fourth highest annual level in the database—behind 2002, 2001, and
2004 (Figure 14). This compares with 5.0 percent for filings in 2007 and 5.7 percent for class
actions filed during the 11 years ending December 2007.
Market
Capitalization
Losses
continued
MPL IndexTM – Maximum Percent Loss
20%
18%
2002
16%
14%
13
12%
2001
10%
8%
2004
Historical Average
(1997 – 2007)
6%
2008
2000
4%
2005
2003
2%
2006
2007
0%
Figure 14
10
Q1
Q2
Q3
Q4
See http://securities.cornerstone.com for complete details on the MPL Index™ calculation.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Market
Capitalization
Losses
continued
Figure 15 provides summary statistics for 2008 filings compared to 2007 and the annual average
over the 1997–2007 period. Both the 2008 median DDL of $231 million and the average DDL of
$1.6 billion were higher than in any previous year. The 2008 median MDL of $1.2 billion was the
second highest after 2002, and the 2008 average MDL of $6.1 billion was the third highest after
2002 and 2001. Figure 15 also shows that the median DDL percent decline for class actions filed in
2008 was 23.9 percent, higher than the 18.8 percent in 2007 and slightly higher than the 23.8
percent annual average for the 11 years ending December 2007.11 Historically, there has been a
statistical relationship between quarterly median percentage DDL declines and quarterly stock
market volatility (Figure 16).
Filings Comparison
Average
(1997 – 2007)
14
2007
2008
192
176
210
$129,611
$742
$112
$152,835
$980
$154
$226,553
$1,607
$231
23.8%
18.8%
23.9%
$697.7
$4.0
$0.6
$676.2
$4.3
$0.7
$856.4
$6.1
$1.2
Class Action Filings
Disclosure Dollar Loss
Total ($ Millions)
Average ($ Millions)
Median ($ Millions)
Median DDL % Decline
Maximum Dollar Loss
Total ($ Billions)
Average ($ Billions)
Median ($ Billions)
Figure 15
Quarterly Median Disclosure Dollar Loss Percent Decline and
S&P 500 Implied Volatility (VIX) Index
Median DDL
1996 – 2008
Percent Decline
45%
VIX Index
Average
70
40%
60
35%
50
30%
40
25%
20%
30
15%
20
10%
10
5%
0%
Figure 16
11
0
96
Q1
96
Q3
97
Q1
97
Q3
98
Q1
98
Q3
99
Q1
99
Q3
00
Q1
00
Q3
01
Q1
01
Q3
02
Q1
02
Q3
03
Q1
03
Q3
04
Q1
04
Q3
05
Q1
05
Q3
06
Q1
06
Q3
07
Q1
07
Q3
08
Q1
08
Q3
Disclosure Dollar Loss percent decline equals the DDL divided by the market capitalization on the trading day immediately
preceding the end of the class period.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Mega Filings
Analysis of “mega” filings shows that relatively few filings account for most of the total market
capitalization losses associated with securities class action filings.
Disclosure Dollar Loss
In 2008 there were 12 mega DDL filings—filings with a DDL of $5 billion or more. This is the
largest number of mega DDL filings for any year in the database. These 12 filings accounted for a
total of $163 billion of DDL in 2008, the second highest mega filing total after 2000, and represent
72 percent of DDL for the year, the third highest share after 2000 and 2001. Four of the 12 mega
DDL filings, including two of the largest three filings, were subprime/liquidity crisis-related.
The 12 mega DDL filings in 2008 represent an increase relative to 2007, when there were nine
mega DDL filings which accounted for 58 percent of DDL in that year. Two of the nine filings in
2007 were subprime/liquidity crisis-related and one of those was among the largest three filings.
15
Maximum Dollar Loss
In 2008 there were 26 mega MDL filings—filings with an MDL of $10 billion or more. This is the
second highest number of mega filings of any year in the database, behind only 2002, and the total
MDL of $682 billion represents the third highest by total MDL after 2002 and 2001. These 26
filings accounted for 80 percent of MDL in 2008, the third highest share after 2002 and 2001.
Twelve of the 26 mega MDL filings, including four of the largest five filings, were
subprime/liquidity crisis-related.
This is a large increase from the 16 mega MDL filings in 2007, which accounted for 74 percent of
MDL that year. Six of the mega filings in 2007 were subprime/liquidity crisis-related, including
three of the largest five filings. There were eight filings in 2008 and nine in 2007 with an MDL in
excess of $25 billion each.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Case Status
Figure 17 shows that most of the filings in the Stanford Law School Securities Class Action
Clearinghouse database have been resolved, with only 20 percent of the filings continuing as of the
end of 2008. As expected, the continuing class actions are concentrated among those filed in recent
years: 76 percent of all continuing class actions were filed after 2005. Among the resolved class
actions, 41 percent were dismissed and 59 percent settled. The majority of cases were resolved
after the first ruling on the motion to dismiss but before a ruling on summary judgments, with 71
percent of dismissals and 59 percent of settlements occurring during this stage. For class actions
filed from 1996 to 2002 and resolved by the end of 2008, the median time to resolution was 33
months, the median time to settlement was 37 months, and the median time to dismissal was 25
months.
The 2007 report examined the continuing class actions from the previous bear market (2000–02)
and found that the average and median DDL for continuing class actions was higher than for
settled or dismissed class actions. Although several large DDL class actions were resolved in 2008,
that finding still holds; the average DDL of class actions settled or dismissed by the end of 2008
was $1.1 billion while the average DDL of continuing class actions was $1.7 billion. Similarly, the
median DDL of class actions that were either settled or dismissed was $114 million, while the
median DDL of continuing class actions was $169 million. These data suggest that class actions
with higher shareholder losses take longer to resolve.
16
Status of Securities Class Action Filings by Year Filed
1996 – 2008
Settled
100%
1%
1%
Dismissed
Continuing
3%
9%
13%
90%
33%
15%
18%
29%
36%
80%
35%
32%
41%
41%
35%
70%
41%
44%
60%
78%
44%
94%
50%
31%
40%
67%
71%
64%
30%
57%
63%
66%
56%
46%
20%
41%
38%
28%
15%
7%
6%
2006
2007
2008
10%
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Figure 17
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Case Status
continued
For class actions that have been resolved, Figure 18 shows the breakdown between settlements and
dismissals. Because the typical time to dismissal is shorter than the typical time to settlement, there
are more dismissals than settlements among resolved class actions in younger class action cohorts.
The mix of settled and dismissed class actions evens out as cohorts age, though 2004 and 2005
both have slightly more dismissed class actions than settled class actions even though more than 80
percent of the class actions in each of these cohorts have been resolved. The uptick in dismissals in
recent years may be related to increased pleading standards in the wake of the Dura decision by the
Supreme Court.
Status of Resolved (Non-Continuing) Securities Class Action Filings
by Year Filed
1996 – 2008
% Settled
17
% Dismissed
100%
90%
33%
29%
36%
80%
42%
36%
33%
39%
47%
51%
54%
53%
70%
68%
60%
50%
100%
40%
67%
71%
64%
30%
58%
64%
67%
61%
53%
49%
46%
47%
20%
32%
10%
0%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Figure 18
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Industry
Figure 19 provides summary statistics on class actions by industry. As discussed in the “Overview”
section and shown in the S&P 500 Securities Litigation Heat Maps™, the financial sector had the
highest incidence of securities class action filings in 2008. While filings in the financial sector had
the highest MDL in 2008, filings in both the industrial sector and the consumer non-cyclical
sectors experienced higher DDL than filings in the financial sector.
Filings by Industry
Dollars in Billions
Industry
Financial
Consumer Non-Cyclical
Industrial
Technology
Consumer Cyclical
Communications
Energy
Basic Materials
Utilities
18
Total
Class Action Filings
Average
1997 –
2007
2007 2008
Disclosure Dollar Loss
Average
1997 –
2007
2007
2008
Maximum Dollar Loss
Average
1997 –
2007
2007
2008
26
45
18
30
24
37
4
3
4
52
35
12
11
23
34
5
3
1
103
37
17
15
12
10
7
5
4
$18
$41
$9
$18
$8
$31
$3
$1
$2
$39
$58
$2
$3
$7
$43
$0
$0
$0
$49
$57
$82
$8
$6
$11
$6
$4
$4
$90
$145
$34
$98
$56
$238
$18
$5
$13
$259
$190
$13
$8
$38
$166
$2
$0
$0
$391
$155
$121
$63
$25
$50
$26
$11
$14
192
176
210
$130
$153
$227
$698
$676
$856
Figure 19
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Exchange
For the first time since 2002, companies listed on NYSE or Amex had more securities class action
filings than companies listed on NASDAQ (Figure 20). In 2008, 111 class actions were filed
against firms listed on NYSE or Amex and 68 against firms listed on NASDAQ. In 2008, total and
median DDL for firms listed on NYSE or Amex were the highest ever, and average DDL was
second only to 2000. Total, average, and median MDL for firms listed on NYSE or Amex were
higher than any year other than 2002. In contrast, several of the DDL and MDL metrics for
NASDAQ firms declined between 2007 and 2008.
In contrast to previous years, there were 31 filings in 2008 against firms not listed on NYSE,
Amex, or NASDAQ, and those filings led to the highest total and average DDL and MDL for firms
not listed on the major exchanges since 2004.
Filings by Exchange Listing
19
Average (1997 – 2007)
NYSE/Amex NASDAQ
Class Action Filings
Filings per Issuer
Disclosure Dollar Loss
Total ($ Millions)
Average ($ Millions)
Median ($ Millions)
Maximum Dollar Loss
Total ($ Billions)
Average ($ Billions)
Median ($ Billions)
74
2.02%
97
2.45%
2007
NYSE/Amex NASDAQ
79
2.13%
80
2.53%
2008
NYSE/Amex NASDAQ
111
2.25%
68
2.22%
$92,084
$1,357
$247
$36,221
$378
$80
$110,751
$1,538
$292
$41,951
$545
$89
$200,924
$2,576
$515
$24,114
$416
$127
$425
$5.9
$1.2
$258
$2.8
$0.4
$538
$7.5
$1.3
$135
$1.8
$0.4
$714
$9.2
$2.5
$129
$2.2
$0.6
Figure 20
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Circuit12
The three circuits with the highest number of filings in 2008 were the Second Circuit (New York)
with 92 filings, the Ninth Circuit (California) with 28 filings, and the Eleventh Circuit
(Florida/Georgia/Alabama) with 17 filings (Figure 21). The Second Circuit filings included 58 of
the 97 subprime/liquidity crisis-related filings and 61 of the 103 financial filings. These three
circuits have held the same ranks since 2006. The Second and Ninth Circuits have been the top two
every year in the database, and the Eleventh Circuit has been in the top four every year other than
2005.
The circuits with the highest total DDL in 2008 were the Second Circuit with $136 billion, the
Third Circuit (Delaware/New Jersey/Pennsylvania) with $30 billion, and the Ninth Circuit with
$17 billion. The Second Circuit accounted for six of the 12 mega DDL filings, while the Third
Circuit contributed three and the Ninth Circuit contributed one. Historically, the Second, Third,
and Ninth Circuits have had the highest DDL levels.
When ranked by MDL, the top three circuits in 2008 were the Second Circuit with $400 billion, the
Ninth Circuit with $173 billion, and the Third Circuit with $101 billion. Second Circuit filings in
2008 were dominated by 10 of the 26 mega MDL filings, while the Ninth Circuit contributed six
mega MDL filings and the Third Circuit contributed three. Historically, the Second, Ninth, and
Third Circuits have experienced the largest MDL.
20
Filings by Court Circuit
Dollars in Billions
Class Action Filings
Circuit
Average
1997 – 2007
Disclosure Dollar Loss
2007
2008
Average
1997 – 2007
Maximum Dollar Loss
2007
2008
Average
1997 – 2007
2007
2008
1
2
3
4
5
6
7
8
9
10
11
12
10
42
17
7
14
10
10
8
49
6
19
1
2
58
10
5
8
6
9
3
45
7
18
5
15
92
11
7
4
13
10
8
28
4
17
1
$6
$36
$22
$3
$11
$9
$6
$4
$22
$3
$7
$1
$0
$93
$12
$0
$1
$1
$5
$7
$21
$4
$6
$2
$4
$136
$30
$2
$1
$8
$16
$11
$17
$0
$3
$0
$23
$220
$79
$17
$57
$37
$28
$14
$176
$13
$31
$4
$1
$443
$39
$2
$6
$3
$28
$9
$109
$6
$17
$12
$15
$400
$101
$13
$3
$39
$61
$39
$173
$0
$13
$0
Total
192
176
210
$130
$153
$227
$698
$676
$856
Figure 21
12
Circuit information corresponds to the first identified complaint.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Classification of
Complaints13
The Stanford Law School Securities Class Action Clearinghouse tracks allegations contained in
class action complaints. A comparison of filings in 2008 with those from 2002 to 2007 reveals
several interesting changes in the mix of allegations (Figure 22).
• The share of class actions alleging 10b-5 claims fell to its lowest level in 2008, dropping
from 80 percent in 2007 to 75 percent. This contrasts with the previous five years, in
which more than 85 percent of filings in every year included 10b-5 claims.
• The share of class actions alleging Section 11 and 12(2) claims increased to its highest
level in 2008. Section 11 claims increased to 19 percent in 2007 and 23 percent in 2008;
Section 12(2) claims increased to 11 percent in 2007 and 19 percent in 2008. In the
previous five years, Section 11 claims peaked at 12 percent and Section 12(2) claims
never reached 10 percent.
• In the 2007 Year in Review we noted an increase in the share of class actions that named
an underwriter as a defendant from 4 percent in 2006 to 11 percent in 2007. The trend
continued in 2008 with 18 percent of filings naming an underwriter as a defendant.
21
• We also noted in the 2007 Year in Review that the percentage of filings alleging
misrepresentation in financial documents had remained stable over 2006 and 2007. This
holds true for 2008 as well. Between 2002 and 2005, the share of filings alleging
misrepresentations in financial documents was below 90 percent; the share increased to
92 percent in 2006, remained steady at 91 percent in 2007, and increased to 94 percent
of filings in 2008. While the percentage of filings alleging false forward-looking
statements decreased from 72 percent in 2006 to 63 percent in 2007, the share rebounded
in 2008, with 70 percent of filings containing these allegations.
• The percentage of filings alleging insider trading continued to decline, from 27 percent
of filings in 2007 to 23 percent in 2008. In contrast, filings alleging insider trading were
above 30 percent in 2003 through 2006. This decline is consistent with a potential
decline in allegations relating to scienter and an increase in the proportion of filings with
Section 11 claims.
• To the extent that allegations of GAAP violations could be identified in complaints
and/or press releases, the incidence of these allegations declined during 2008. The
percentage of complaints alleging specific accounting irregularities decreased to 44
percent in 2008 from 48 percent in 2006. This decline may be an artifact of the tentative
nature of initial class action complaints in the study.14
• Consistent with the increase in filings related to the subprime/liquidity crisis, there was a
shift in the emphasis in GAAP allegations from those related to the traditional income
statement line items to allegations related to balance sheet components. The share of
filings alleging GAAP violations that specified revenue recognition decreased from over
35 percent in 2002 through 2006 to 17 percent in 2007 and 26 percent in 2008. Also,
filings alleging understatement of expenses decreased from 46 percent in 2006 to 19
percent in 2007 and 14 percent in 2008. Meanwhile, the percentage of GAAP-related
filings alleging the overstatement of assets other than accounts receivable and problems
with estimates both increased to new highs in 2007 and 2008. In contrast, the percentage
of GAAP-related filings alleging understatement of liabilities increased from 2006 to
2007 and then decreased in 2008.
13
14
The classifications are based on the first identified complaint. Additional allegations and defendants may be added in subsequent
complaints and are not captured in these analyses.
Some filings are included in multiple classifications.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Classification of
Complaints
continued
• “Other” accounting allegations remained below the high level in 2006, with 27 percent
in 2008 and 30 percent in 2007 compared with 62 percent in 2006. Allegations related to
accounting for option issuance declined in 2008; the share of “other” filings containing
such allegations dropped to 16 percent in 2008 from 36 percent in 2007 and 44 percent
in 2006.
• Seven of the 192 companies involved in class actions in 2008 (4 percent) subsequently
claimed bankruptcy. In 2007, only two out of the 172 companies involved in class
actions (1 percent) subsequently claimed bankruptcy in that year. Five additional
companies that were involved in the 2007 filings subsequently claimed bankruptcy in
2008 (3 percent).
Allegations Box Score
22
2002
2003
2004
2005
2006
2007
2008
Percentage of Total Filings
General Characteristics
10b-5 claims
Section 11 claims
Section 12(2) claims
Underwriter defendant
Auditor defendant
Allegations
Misrepresentations in financial documents
False forward-looking statements
GAAP violations
Insider trading
87%
11%
9%
5%
6%
91%
9%
4%
2%
6%
87%
7%
5%
1%
4%
91%
9%
5%
5%
3%
87%
12%
9%
4%
3%
80%
19%
11%
11%
1%
75%
23%
19%
18%
2%
82%
69%
58%
27%
88%
79%
56%
31%
79%
68%
48%
40%
87%
81%
43%
45%
92%
72%
67%
39%
91%
63%
48%
27%
94%
70%
44%
23%
Percentage of Filings with Alleged GAAP Violations
Specifics of Accounting Allegations
Revenue recognition
Understatement of expenses
Overstatement of accounts receivable
Understatement of liabilities
Overstatement of other assets [1]
Non-recurring items
Overstatement of inventory
Acquisition accounting
Estimates
Derivatives/hedging
Other
49%
52%
53%
12%
23%
9%
11%
8%
6%
4%
5%
44%
14%
53%
8%
24%
8%
12%
7%
8%
3%
11%
60%
21%
16%
13%
13%
1%
5%
5%
3%
1%
10%
53%
26%
21%
18%
12%
5%
15%
4%
10%
6%
37%
35%
46%
9%
10%
12%
4%
5%
5%
1%
0%
62%
17%
19%
12%
17%
29%
1%
8%
5%
17%
2%
30%
26%
14%
14%
9%
32%
4%
7%
3%
18%
8%
27%
[1] Defined as all assets other than accounts receivable and inventory.
Figure 22
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
New Developments
Treasury Bailout
On October 3, President Bush signed the Emergency Economic Stabilization Act (EESA) of 2008,
a $700 billion financial bailout package to reduce the liquidity constraints facing financial
institutions and promote the flow of credit.15 To the extent that the injection of government funds
effectively reduces liquidity constraints, it may have the effect of spurring increased litigation
activity by increasing the expected payoff to litigation.
Under EESA, the Troubled Asset Relief Program (TARP) was created with the stated goal of
supplying government funds to purchase distressed “mortgages and any securities, obligations or
other instruments that are based on or related to such mortgages” from financial institutions
suffering from the consequences of the subprime/liquidity crisis.16 The first $250 billion of the
package was used, however, to inject capital into the financial markets by purchasing equity in
struggling financial institutions.17 This was meant to increase the flow of credit and restore
confidence in the banking system.18 In November, Treasury Secretary Henry Paulson announced
that he intended to use some of the remaining TARP funds to prevent foreclosures and support the
market for consumer debt such as credit cards and college loans.19
23
It is not yet clear whether the program has had the desired effect of thawing the credit markets. In
December, the Government Accountability Office (GAO) stated that the Treasury needed to
develop policies to ensure that TARP was achieving its goals and that banks receiving government
funds were adhering to executive compensation and dividend payment restrictions.20 Concerns
have been raised that some banks intend to use bailout money to purchase healthy banks or to pay
higher dividends rather than to provide loans.21
Bank Failures
In 2008, bank profitability suffered and failures increased due to the worsening subprime/liquidity
crisis and the housing downturn.22 As of December 15, 2008, 25 U.S. banks had failed and been
taken over by the Federal Deposit Insurance Corporation (FDIC). By comparison, just three banks
failed in 2007, and none failed in 2006 or 2005.23 Five of the 25 banks that failed in 2008 were
named in federal securities class actions filed in 2008.24
15
16
17
18
19
20
21
22
23
24
Dina Temple-Raston, “Bush Signs $700 Billion Financial Bailout Bill,” National Public Radio, dated October 3, 2008; “Pelosi,
Reid, Dodd, Frank Renew Call on Bush to Use TARP to Aid Auto Industry in Light of Risks to Financial System,” Wall Street
Journal MarketWatch, dated December 4, 2008.
Joanna Chung, “Treasury Tackled over TARP Concerns,” The Financial Times, dated December 3, 2008; Dina Temple-Raston,
“Bush Signs $700 Billion Financial Bailout Bill,” National Public Radio, dated October 3, 2008; Alan S. Blinder, “Got $700
Billion? Sweat the Details,” The New York Times, dated October 11, 2008.
Joanna Chung, “Treasury Tackled over TARP Concerns,” The Financial Times, dated December 3, 2008; Richard Cowan and
Rachelle Younglai, “UPDATE 3-US GAO: Critical Issues Not Yet Addressed in TARP,” Reuters, dated December 2, 2008; Alan S.
Blinder, “Got $700 Billion? Sweat the Details,” The New York Times, dated October 11, 2008.
Richard Cowan and Rachelle Younglai, “UPDATE 3-US GAO: Critical Issues Not Yet Addressed in TARP,” Reuters, dated
December 2, 2008.
Stephen Gandel, “Banks Left Out of TARP Bailout Could Face Extinction,” Time, Inc., dated November 13, 2008.
Joanna Chung, “Treasury Tackled over TARP Concerns,” The Financial Times, dated December 3, 2008.
Richard Cowan and Rachelle Younglai, “UPDATE 3-US GAO: Critical Issues Not Yet Addressed in TARP,” Reuters, dated
December 2, 2008.
Karey Wutkowski, “FDIC Sees 117 Problem Banks; Most Since 2003,” Reuters, dated August 26, 2008.
“Failed Bank List,” Federal Deposit Insurance Corporation, updated December 15, 2008.
http://www.fdic.gov/bank/individual/failed/banklist.html.
Only 11 of the 25 banks that failed were publicly traded.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
New Developments
continued
Not only did the number of bank failures rise in 2008, some of the failed banks were much larger
than banks that failed in prior years. The largest of them was Washington Mutual, which was
seized by federal regulators on September 25 and sold to JPMorgan Chase. With $307 billion in
assets, Washington Mutual was “by far the largest bank failure in American history.”25
In the second quarter of 2008, the number of U.S. banks on the FDIC’s “watch list” rose 30 percent
to 117, the highest level in five years. FDIC Chairman Sheila Bair warned that more banks might
be added to this list of “institutions with financial, operational, or managerial weaknesses that
threaten their financial viability.”26 Despite the increase in the number of failing and troubled
banks, Bair said that 98 percent of the 8,500 U.S. banks continue to be well-capitalized.
Market Volatility
Financial markets were extremely volatile in 2008. The S&P 500 index dropped by 40 percent
from the start of the year through December 15, 2008. The Dow Jones Industrial Average
experienced its largest one-day point loss (777 points or almost 7 percent) in September 2008 and
four of its five largest one-day point losses were in the fourth quarter. The combined market
capitalization of U.S companies declined by over $6 trillion in 2008. Volatility, as measured by the
Chicago Board Options Exchange Volatility Index (VIX), climbed to 80.86 in November 2008, the
highest level in the 18-year history of the index. According to a November 2008 Goldman Sachs
research note, the S&P 500 three-month realized volatility reached 66 percent, exceeding the levels
during the 1987 stock market crash and the Depression.27 As discussed above, filings, however, did
not rise sharply in the fourth quarter of 2008, possibly due to difficulty in isolating allegedly
fraudulent company-specific stock movements from general market volatility.
24
25
26
27
Eric Dash and Andrew Ross Sorkin, “Government Seizes WaMu and Sells Some Assets,” The New York Times, dated September
25, 2008.
Karey Wutkowski, “FDIC Sees 117 Problem Banks; Most Since 2003,” Reuters, dated August 26, 2008.
“US Stock Volatility is Expected to Stay High for Rest of Year,” Economic Times, dated November 22, 2008.
© 2009 by Cornerstone Research. All Rights Reserved.
CORNERSTONE RESEARCH
Contact
Please direct any questions or requests for additional information to:
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Cornerstone Research
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